January 16, 2010

Baidu’s Gain from Departure Could Be China’s Loss

And while that could initially bolster the prospects of Baidu (pronounced by-DOO), a home-grown company that is already dominant here, analysts say Google’s departure could also slow the overall development of the Internet in China.

“The whole industry will become worse,” said Yu Yang, chief executive of Analysys International, a Beijing research firm. “Without competition with Google, Baidu has no motivation to innovate.”

Analysts say that Baidu established a leading position in the Chinese market through a combination of factors, including a keen understanding of local tastes and its willingness to cooperate with government censorship efforts.

Today Baidu has about 300 million visitors, a market value of more than $15 billion, and 63 percent of Internet search revenue in China, nearly double the 33 percent share of Google, according to iResearch, a Chinese consulting firm.

“It’s a duopoly in China,” said Richard Ji, an analyst at Morgan Stanley. “There’s just Baidu and Google. And Baidu’s way ahead.”

The prospect that Baidu could become a de facto monopoly in China’s search market sent its American depositary receipts soaring 13.7 percent on Wednesday. They closed at $439.48.

Some analysts said that Google’s inability to catch Baidu was one reason the American company might have decided it was willing to give up on the China market.

Baidu was co-founded in 1999 by Robin Li, a graduate of one of China’s top schools, Peking University. He later studied computer science at the State University of New York at Buffalo, and then began experimenting with search engine technology. Mr. Li worked at Infoseek, one of Silicon Valley’s earliest search engine companies, before returning to China to co-found Baidu with a young biochemist.

The company was listed on the Nasdaq in August 2005 at $27 a share.

Mr. Li, 41, is now worth an estimated $3 billion, according to Forbes.

Larry Rafsky, who worked with Mr. Li at a New Jersey software company in the 1990s, called him an Internet pioneer. He invented a “page-ranking algorithm virtually identical to what we know about Google’s first attempts,” Mr. Rafsky said in an e-mail interview a few years ago.

Google, meanwhile, dipped its toes in the Chinese market back in 2000, when it developed a Chinese-language interface for its main Google.com site. In 2004, it acquired a small stake in Baidu, which was then a tiny start-up.

In 2006, Google entered the market more directly by starting Google.cn, a search engine specifically built for Chinese users. At that time, Google agreed to censor Google.cn to screen out content that the Chinese government found objectionable, drawing criticism from some human-rights groups. The company sold its $60 million stake in Baidu shortly thereafter.

Despite its leading position in much of the world, Google has had difficulty gaining ground on Baidu.

Google executives insisted they had better technology; Baidu countered that it had local expertise.

In China, Internet users are mostly young and searching for music and entertainment rather than information. Baidu created a shopping mall of Web offerings, many of them imitations of popular Web sites like MySpace.

Baidu also dominates music downloads, often with links to Web sites that music companies say offer illegal downloads. Baidu has defended the practice, saying it simply provides the links.

Baidu’s strong relationship with the government contributed to its rise. “If the government wants something removed, it will do it immediately,” said Hong Bo, a consultant with 5G, a Beijing consultancy. “On the other hand, everything with Google has to go through its headquarters.”

Baidu faced criticism after the local media published reports saying Baidu gave high search rankings to companies selling illegal drugs. Soon after, Baidu signed a multimillion-dollar sponsorship deal with China Central Television, which had broadcast an investigative piece on Baidu. A spokesman for Baidu declined comment on the incident.

Google made some inroads against Baidu last year under Lee Kai-fu, a former Microsoft executive who took over Google’s China operations in 2006. But Mr. Lee announced his departure from Google last September, saying he was forming a company that would help Chinese start-ups.

Google has also tangled with the government over videos on its YouTube site and links to content that censors said was obscene.

Late last year, some Chinese book authors attacked the company, saying it had scanned their books without permission. Google apologized Monday and said it would work to strike a formal agreement on the scanning.

Now, after building a company with 700 employees and about 200 engineers in Beijing, Google says it is considering pulling out of China altogether.

If Google follows through on its threat, analysts say that Yahoo China, whose market share has plummeted since being sold to a local company called Alibaba, could gain market share. Microsoft, the No. 5 player by share of searches according to comScore, could also seek to fill the void.

But if other search companies do not step in, Chinese users could be seriously hurt, some Internet experts said.

“If Google really pulls out of China, for millions of citizens, they lose an excellent search engine and its relevant Internet services, like the Android mobile phone,” said Fang Xingdong, chief executive of Chinalabs.com, and the so-called father of the Chinese blog.

“Chinese netizens are the biggest loser in this accident.”

Bao Beibei contributed research to this report.

Chief Executive Steve Ballmer said Thursday the software giant had no plans to pull out of China. Microsoft is chiefly interested in getting Beijing to crack down on intellectual property rights, and has no desire to ruffle relations, analysts said. “I don’t understand how that helps anything. I don’t understand how that helps us and I don’t understand how that helps China,” Ballmer said. Most of the company’s software in China is pirated, and effective policing would potentially add billions of dollars in revenues for its Windows and Office software business. For Yahoo, protecting the personal information of users in China is a particularly touchy subject. In 2007, Yahoo outraged human rights activists after accusations that the Internet giant had handed over the mail, data on online activity and Internet addresses of suspected dissidents to Chinese officials. Though Yahoo eventually settled the lawsuits brought by lawyers acting on behalf of jailed dissidents. The suit, advanced by the Washington D.C.-based World Organization for Human Rights USA, maintained that Yahoo had benefited financially by working with Chinese authorities. Yahoo also no longer maintains its own Internet site in China. In 2005, Yahoo handed over exclusive rights to the “Yahoo China” brand name and folded its Chinese mail, messaging and other operations into the Alibaba Group, in a $1 billion deal that gave Yahoo a 40 percent stake in Alibaba.